“While the effect of Goods and Services Tax (GST) continues to fade, there is downward pressure on disposable income arising from the weak ringgit and decline in corporate profitability,” the brokerage said in a report.

It noted that while consumer sentiment improved slightly last year, the weak ringgit, concerns over the economy and job security led 77% of consumers in a Nielsen survey in the third quarter to believe that the nation was “in a recessionary state”.

“Latest figures from the Malaysian Institute of Economic Research (MIER) have shown that both consumer sentiment index (CSI) and business condition index (BCI) hit historical lows in the third quarter of 2015 but rebounded in 2016. We anticipate consumer sentiment to experience a slow recovery while staying below the threshold level (100) in 2017 as the effect of GST continues to fade and various financial assistance are afforded to consumers,” it said.

It also said that with the new Price Control and Anti-Profiteering (PCAP) Regulation 2016 coming into effect from the beginning of the year, companies face limited flexibility in pricing, especially given the environment of weak ringgit, escalating commodity prices and higher minimum wage.

It said retailers will be confronting either margin erosion or passing on the costs to consumers and risking lower sales volume.

PCAP 2016 succeeds PCAP 2014 that was passed and implemented in tandem with the GST to deter traders from indiscriminately raising prices of goods or services by profiteering from GST.

Kenanga Research also said this year will be challenging for the consumer sector as the cost advantage from the soft commodity market has diminished and this has been further aggravated by the weak ringgit.

However, it has not turned bearish on consumer stocks, believing the sector to be resilient and defensive enough supported by the healthy private consumption, further evidenced by the recovery in sentiment from the low in end-2015.

It expects price increases in the short-to-mid-term in spite of the implementation of the PCAP 2016, but the increases will be minor because of more cautious and strategic price strategies.

“While the market could negatively react with a decline in general demand, we believe an uptick in net earnings could still be seen as companies are expected to test their pricing strategies with progressive increments in determining an ideal price point to maximise margin improvements while also ensuring market share remains intact,” Kenanga Research said.

The research house added that while PCAP 2016 appeared to impede the view of there being less upward price pressure, food producing and trading companies were seeking avenues to keep margins sustainable against rising operational costs.